LLC Elects S Corporation Status - The Best of Both Worlds?

Published on Apr 29, 2010

Summary

Learn how you can set up an LLC and, after setting it up, elect to have the LLC treated as an S corporation for tax savings.

So you are ready to start a small business, eh? You have a wonderful vision for a unique new service or special product. Your business plan is a work of art. You are ready to cast off from the safety and security of your cubicle at the office and blaze a new trail of entrepreneurship. Congratulations!
Now, as you start, run and grow your new business, how do you intend to structure it so that it becomes an efficiently operating, thriving enterprise? Two of the most popular organizational forms today are the limited liability company (LLC) and the S corporation. But what if I told you that you could have the best of both worlds, so to speak, by establishing an LLC and then electing to be treated like an S corporation for tax purposes? Well, it can be done.
Business owners--even attorneys and accountants--often get twisted up in the debate over which is best, the LLC or the S corporation. But it's not necessarily an either/or proposition. Rather, you can set up an LLC and, after setting it up, you can elect to have the LLC treated as an S corporation. If your LLC operates an active trade or business, and payroll taxes (SECA taxes) on the owner or owners are high, you may find that an S corporation election is the best choice.
Both organizational forms share the characteristic of "passing-through" their income to the owner(s). Both also provide their owner(s) limited liability protection. But each has some distinguishing features, too. You, as a new business owner, will want to consider the differences as you choose the form for your enterprise.

An LLC beats an S corporation for ease of operation and administration.

An LLC beats an S corportation for profit-sharing flexibility.

An S corporation beats a typical LLC for flexibility in paying its earnings to owners as either earned income in the form of salaries and wages or passive income in the form of distributions.

An S corporation beats an LLC for various tax planning purposes.

To learn more about the features of an LLC and the features of an S Corp, read the rest of this article at Toolkit.
BizFilings would like to thank guest blogger and Toolkit staff writer, Robert Steere, for his contribution. Roberthas served as general counsel for a state tax department, as tax policy director for a state chamber of commerce, and as a tax specialist for two major CPA firms during his 30-year professional career. Bob holds a BS degree from Michigan State University and a JD degree from University of Michigan Law School.